Saturday, March 18, 2006

the game of chicken and the mind of Chicken Little

We now have a report on America's current account balance from the Bureau of Economic Analysis. The news is worse than expected and once again we're being informed that this "huge debt owed by the United States to the rest of the world" is being financed by foreigners who buy US securities. Here's a graphic from the BE report:

Economists know the debt can't keep increasing at this accelerated rate and they know the US can't keep relying on foreigners to balance the account. The US government, the Chinese government, the European Union, the oil-rich countries. and the emerging economies of the world all need to take action. Raghuram Rajan of the IMF writes and speaks persuasively about this need. Only the Chinese have done anything worth reporting on and that was meager. I'm thinking there's a breathtakingly-large game of chicken in progress. All the players know that concerted action is needed and none of them wants to take the lead. Of all the players, the US is the one with the most pressing need to begin this concerted action and, as the world's most powerful nation, the one from whom most others expect first action.

However, as we all know, in the US it's a classic situation of short-term gratification trumping long-term payoff. As with our broken system of entitlements (e.g., Social Security and Medicare), the government doesn't have the stomach to face up to future disaster when this distant harm is pretty much invisible here and now. Harvard Magazine has a current article on behavioral economics that explains this phenomenon. The author, Craig Lambert, quoting behavioral economist David Laibson writes: “There’s a fundamental tension, in humans and other animals, between seizing available rewards in the present, and being patient for rewards in the future. It’s radically important. People very robustly want instant gratification right now, and want to be patient in the future. If you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’ Now we want chocolate, cigarettes, and a trashy movie. In the future, we want to eat fruit, to quit smoking, and to watch Bergman films.”

You might say this lack of discipline is a short-coming of democracy, but although it makes sense for the US to take the lead, it also seems inevitable that the other players -- many of them single-party states -- can't afford to sit back and wait for this to happen. So far, that's what they're doing however. With China and the others reluctant to act, it's probably -- as I say -- more of a game of chicken: one in which everyone is hoping one of the others will be the first to be forced to act.

Here are a couple of items from the news warning Americans to be less like grasshoppers and more like ants. {Note: There are also items in the news showing how well our economy is growing, how low is our rate of unemployment, and how strong is our stock market. I put these on the grasshopper side of the equation, but you might not.}

Item 1.

The current BEA report was preceeded a week ago by another giving the following news:
The U.S. goods and services deficit widened in 2005. The deficit increased $106.0 billion from $617.6 billion in 2004 to $723.6 billion in 2005, as imports increased nearly twice as much as exports. As a percentage of U.S. gross domestic product, the goods and services deficit increased from 5.3 percent in 2004 to 5.8 percent in 2005.

This BEA graphic, strikingly like the one above, gives the general idea.

{click to enlarge}

Item 2.

As Steven Pearlstein says "being American means not giving a damn about what the rest of the world thinks about us."
Foreign Owners Overboard?
[click graphic to enlarge}
In Blocking Dubai Ports World, America Ignores Its Debtor Status
By Steven Pearlstein
Friday, March 10, 2006; Page D01


Members of Congress, reflecting the fears and prejudices of their constituents, [have] succeeded in blocking a Dubai-owned company from taking over management of terminals at six American ports. The global message it sends -- and, in particular, to friendly Arab and other Muslim countries -- is that we don't really need your money, and in this post-9/11 world we're going to be very picky about whom we do business with.

[There are plenty of other examples of this nose-thumbing.] Maybe it was possible to get away with this noxious blend of arrogance and ignorance when the United States was the world's only economic superpower. But now that we've become the biggest debtor nation in the history of civilization, we might want to give a bit more thought to whom we tell to buzz off.

It was more than a bit ironic that on the very day that Dubai Ports World threw in the towel and agreed to sell off its U.S. operations, the Commerce Department announced yet another record monthly trade deficit for January, putting us on course to exceed last year's record deficit of $724 billion. At this rate, we are adding to our debt to the rest of the world at the rate of $2,500 a year for every man, woman and child in America.

Where do you think that $724 billion comes from? Let me tell you: It comes from the people who have the dollars. And in case you hadn't noticed, tops on that list are the Japanese who are selling us all those cars, Arabs selling us all that expensive oil, and the Chinese selling us the shirts on our backs, the athletic shoes on our feet and all those computers and flat-screen TVs in front of our noses.

If these folks suddenly get the idea that we don't really trust them enough to do business with them, and begin acting the way human beings do when they get poked in the eye, you could be looking at 8 percent mortgage rates, 6 percent unemployment, $4 gasoline, a $1.50 euro and a 9000 Dow.

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